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Pollution Risks for Renewable Energy Projects

For many people pollution risks and environmental impairment liabilities are associated with big polluting industries such as pulp and paper manufacturing facilities or coal-fired power plants. On the other hand, wind, solar and various renewable energy projects are considered “green,” and thought to offer no risks or potential exposure to pollution. Canadian Underwriter stated that environmental risks are one of the top 10 most important risks for businesses in Canada. The reality is that no type of energy production is free of risk, and renewable projects face potential pollution liabilities as well.

The Ministry of the Environment (“MOE”) considers pollution to be any change to the natural environment. This can mean anything from excessive silt in a river to dust contaminating wetlands surrounding a project. Owners and developers therefore need to shift their views of pollution to address the increasingly stringent guidelines of the MOE because what could appear harmless could have a negative impact on the natural environment.

No energy production is risk-free, even renewable projects face pollution liabilities.”

Key Steps to Mitigating Pollution Risks
The old adage of “a good offence is a good defense” holds true for renewable projects. When purchasing a site, it is critical to ensure that the proper environmental studies have been carried out to inform owners and developers of any potential existing pollution exposures. At a minimum, owners should be carrying out a Phase I Environmental Site Assessment by a qualified environmental engineer.

Once a site is determined clean or pollutants have been identified, it is key for owners and developers to enter into sound contracts with the general contractor who will build the project. They should ensure that the general contractor is carrying a Contractor’s Pollution Liability (“CPL”) policy to cover any pollution the contractor may cause while on the site, or any existing pollution condition that they may exacerbate as part of the works. The owner/ developer should be named as an additional insured party to this policy and the contract should make provisions for the number of years the contractor should be required to maintain the insurance.

An example of this is an excavation contractor who was hired to excavate a trench for the installation of specialized cabling/ wiring. An ESA was performed which identified minimal contamination within allowable tolerances. The contractor completed his excavation activities and stockpiled the soil on an adjacent property. The stockpiled material was later used as backfill at a rural residential development. Weeks later, a new ESA revealed larger concentrations of soil contamination on the residential land and extensive remediation was required. This loss was uninsured because there was no CPL policy in place.

Lastly, owners and developers should ensure they are purchasing Fixed Site Pollution Liability to protect their assets for claims that may arise where the general contractor is not responsible. An example of Fixed Site Pollution Liability is where a developer purchases a greenfield site to develop their project. They did proper due diligence and carried out a Phase I ESA in additon to requiring the general contractor to carry CPL. When the contractor started excavation, they found 50 barrels of toxic substances that a farmer had allowed a polluting company to bury in the 1950s. As a result, the cost to remediate was several million dollars and luckily the developer had purchased Fixed Site Pollution Liability coverage. If they had not, the CPL policy would not protect them as it was not a) pollution caused by the contractor or b) pollution exacerbated by the contractor.

Common Misconceptions with Environmental Insurance

You only need pollution coverage during the Construction Period.

While the greatest risk of environmental damage to a project is during the construction period, owners and developers have an ongoing exposure on site. A perfect example of this occurred on a solar wind project in Ontario which experienced flash flooding in heavy rainfalls in the summer of 2013. Although there were proper storm systems in place, an excessive amount of silt ran into the brook, which caused a change in the natural environment. The solar farm was assessed a MOE fine and ordered to put in secondary protection systems to prevent silt from entering the brook in the future.

CPL Policies provide appropriate protection for the owner’s fixed site exposure.

The majority of solar and wind projects in Canada rely on the contractor’s blanket CPL policy, which will only provide protection for the contractor’s actions. In addition, owners and developers would typically only be named as an additional insured party under these policies. Stand-alone contractor’s pollution/ fixed site policies are commercially available, but need to be purchased separately to pick up both the construction and fixed site exposures on a project.

“Sudden & Accidental” provisions provide enough protection. 

Another popular misnomer among renewable energy project contractors and owners is that Sudden and Accidental (or Limited Pollution) provisions under Commercial General Liability policies provide adequate coverage. The Sudden & Accidental extension only provides coverage for off-site third party exposure, and for “sudden and accidental” pollution events – for example, a sudden fuel spill at the job site – that occur and are reported to the insurer within a certain time period. This extension does not provide any coverage for claims arising out of gradual pollution conditions like a slow and accumulating fuel leak. This policy also does not provide any first party or “on-site” pollution clean-up coverage, or any coverage for fines or damages owing to relevant authorities.

“The D&O policy will protect me.”

Unbeknownst to the majority of directors and officers, liability policies exclude claims arising from environmental exposures. Therefore, owners and developers cannot rely on their D&O policy to protect them if they fail to take out and maintain the proper environmental insurance. This could leave the directors of a company personally liable in the event the MOE assesses a Margin of Exposure fine or if a suit is launched from an adjacent property.

Environment Policies – Beyond Clean Up
Pollution policies have come a long way since their introduction in the 1990s. They now offer a number of endorsements that go beyond the typical site clean-up that one thinks of when they consider the insurance. The current policies offer extensions such as:

  • Natural Resource Damage – damage to natural resources such as wildlife while remediating a site;
  • Disaster Response Expenses – extra expenses to address immediate pollution clean-up;
  • Inspection and Investigation of Pollution Condition extensions – additional funds to investigate potential pollution conditions;
  • Coverage for Midnight Dumping, Associated Legal Costs – cost of bringing in environmental counsel;
  • Diminution in Value – loss of value of the property;
  • Business Interruption resulting from a pollution event.

In the ever-changing and stringent world of environmental guidelines, owners and developers need to protect themselves and their investments from potential liabilities. The majority of lending agreements require a full environmental indemnity in favour of the lenders further exposing owners and developers. So it is time for owners of renewable projects to stop turning a blind eye and feel they are not a polluting industry – instead, they need to shift to a position where they are assessing the true environmental risks that they face. Through proper due diligence, contractual transfer and insurance transfer, owners and developers can effectively mitigate the pollution exposure to protect their directors and offices and their bottom line.

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